After two-year pursuit, Sprott lands Central Fund of Canada, doubling gold and silver funds

Share

Sprott Inc.'s two-year pursuit of rival Central Fund of Canada Ltd. neared an end Monday with a friendly deal to acquire the $4.3-billion bullion fund manager for $125-million.

Toronto-based Sprott will double the size of its gold and silver bullion funds to $8.5-billion and add 90,000 new investors by acquiring Central Fund, which was established in 1961 and is controlled by CEO Stefan Spicer and his extended family.

Sprott is offering $105-million in cash and $15-million in shares for Central Fund, whose shareholders are expected to vote on the takeover in late November. In addition, Central Fund's current managers are entitled to a $5-million minimum payment in a year's time; the amount may rise if the combined funds hit performance targets.

Sprott first offered to buy Calgary-based Central Fund in 2015 and was in the process of making a hostile bid for the company through the Alberta courts. Sprott executives said Monday in a conference call that the transaction turned friendly recently after the two sides agreed on a fair price for Central Fund.

Sprott based its takeover pitch in part on the potential to eliminate the gap that historically exists between the price of Central Fund units and the value of the gold and silver held by the fund. Sprott estimates that Central Fund investors will gain $300-million if the discount is eliminated. In a press release to announce the takeover Monday, Central Fund said that under Sprott's ownership, "the trust is expected to trade closer to its underlying value."

Bullion funds are a business where scale counts, as larger players can lower administrative costs such as storing precious metals. With total assets under management of $11.5-billion following the Central Fund acquisition, Sprott is far smaller than industry leaders such as the $34.4-billion (U.S.) SPDR Gold Shares, which is the world's largest bullion-based exchange-traded fund.

Sprott chief executive officer Peter Grosskopf said Monday that with the Central Fund agreement in place, his company is turning its attention to a number of other growth opportunities, including further acquisitions, expansion into new regions and launching new bullion funds for institutional investors.

Under Mr. Grosskopf, Sprott has narrowed its focus to precious metal funds, lending to resource companies and hedge funds. The company raised $46-million in recent months by selling its mutual fund and private client divisions. Sprott expects to have $216-million of cash on hand after the Central Fund acquisition is completed.

If Central Fund shareholders vote in favour of Sprott's offer in November, the transaction is expected to close early in 2018.

Sprott was founded in 2001 by fund manager Eric Sprott, a long-time proponent of gold as an investment. Mr. Sprott remains a significant shareholder but no longer takes part in day-to-day business and stepped down as the company's chairman in April.

The money manager went public in 2008 at $10 a share but has seen its share price slump in recent years; shares traded at $2.16 on Monday following announcement of the Central Fund acquisition, up 2 per cent from Friday's close.